Correlation Between CME and Nasdaq
Can any of the company-specific risk be diversified away by investing in both CME and Nasdaq at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining CME and Nasdaq into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between CME Group and Nasdaq Inc, you can compare the effects of market volatilities on CME and Nasdaq and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in CME with a short position of Nasdaq. Check out your portfolio center. Please also check ongoing floating volatility patterns of CME and Nasdaq.
Diversification Opportunities for CME and Nasdaq
Poor diversification
The 3 months correlation between CME and Nasdaq is 0.67. Overlapping area represents the amount of risk that can be diversified away by holding CME Group and Nasdaq Inc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Nasdaq Inc and CME is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on CME Group are associated (or correlated) with Nasdaq. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Nasdaq Inc has no effect on the direction of CME i.e., CME and Nasdaq go up and down completely randomly.
Pair Corralation between CME and Nasdaq
Considering the 90-day investment horizon CME is expected to generate 12.55 times less return on investment than Nasdaq. But when comparing it to its historical volatility, CME Group is 1.12 times less risky than Nasdaq. It trades about 0.03 of its potential returns per unit of risk. Nasdaq Inc is currently generating about 0.36 of returns per unit of risk over similar time horizon. If you would invest 7,534 in Nasdaq Inc on August 28, 2024 and sell it today you would earn a total of 618.00 from holding Nasdaq Inc or generate 8.2% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
CME Group vs. Nasdaq Inc
Performance |
| Timeline |
| CME Group |
| Nasdaq Inc |
CME and Nasdaq Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with CME and Nasdaq
The main advantage of trading using opposite CME and Nasdaq positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if CME position performs unexpectedly, Nasdaq can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Nasdaq will offset losses from the drop in Nasdaq's long position.The idea behind CME Group and Nasdaq Inc pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.Check out your portfolio center.Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.
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